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atic r c u a e r On bu rance o n g i d lies an ealized that r ats in thre ial anc for fin nce of de indepen ine ic Ukra t s li i e s a rn i r J ou q u i n

Case papers: Deposits under lock Who ruined confidence of the biggest investor into national economy – Ukrainian investee? p.4

HOW BUREAUCRATS WERE SELLING UKRAINIAN CAPITAL MARKET INFRUSTRUCTURE

Masters of epistolary genre AUSD lobbyists again show the miracles of disingenuity. Letter of the Head of National Bank Mr. Stelmakh to National Security and Defense Council of Ukraine is a new proof of lies and ignorance in AUSD case. p.8 Future is fatal, outcome is lethal? Ukraine looses the remains of its competitiveness on international capital market. Ukrainian capital market infrastructure moves under control of non-residents – who is in profit? p.14


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“Horns and hoofs” again or “Wheel of Fortune” in Ukraine?

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epositors of Ukrainian banks turned out to be Buratinos again. The history of financial pyramids seemed to teach us a lot. But it did not. Years passed and financial frauds in 90ties’ style reborn again as Phoenix bird. Everything new is actually well-forgotten old. It seems that thievish financiers remember this well-known saying and decided to restore already forgotten fraudulent schemes. But there are also some alterations in modern “pyramids” – immensity and state authorities’ auspices. This time, National Bank of Ukraine and Securities and Stock Market State Commission turned out to be financial scammers. Immensity means that millions of Ukrainians became hostages in “Banking system of Ukraine” pyramid who even after cancellation of moratorium for pre-schedule deposits withdrawal still remain face-to-face with their problems and not returned deposits. Regulators’ auspices resulted in fact that NBU in the person of Vladimir Stelmakh (as Alisa fox) and SSMSC in the person of Anatoliy Balyuk (as Bazillio cat) almost destroyed 18 years work for creation of TRUST in financial system. As a result, financial system lost USD 10 bln in October-January period (USD 4 bln of corporate clients and USD 6 bln of individuals). This is 15% of corporate and individual clients’ funds of historic peak level of October 1, 2008! And it equals promised IMF loan for the whole year. Against market crash, regulators develop large-scale commercial projects allocating money for private depository creation. Domestic level of State “managers” thinking will not allow Ukraine to find the way out of crisis painlessly. And how may it happen if the country loses its competitiveness not only in the banking sector but also in the world capital market passing in total control of large international players of exchange and depository markets, and moreover may overrun national banking sector in terms of decentralization? So, we must admit unpleasant conclusion that vested interests of few persons in Ukraine overweight interests of all its citizen. n

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Deposits under lock A number of failures in Ukrainian economy are due to the crisis of Faith. People do not believe in authorities anymore as well as banks – and carry their money out of the economy “in stocking feet”. As a result – the banks not only reject credits but collect the earlier given ones using all possible ways. The enterprises of all economy branches – starting from metallurgy to groceries - deprived of credit resources are forced to fire the staff. The discharged people are not able to consume and return credits. And all together – the enterprises as well as people reduce payments to the budgets of all levels. In such way the lack of faith turns into money. Correctly, into the lack of them. Not for free Ukraine has been going through the much scaled crisis among all the world countries. Thus, during the period from October to January the bank system lost $10 billions (almost $4 billions belong to corporate and $6 billions – to individuals). This amount makes up 15% of corporate and individuals’ funds from the historically peak level of October 1st, 2008! And this is the sum which the International Monetary Fund promises in the capacity of aid credit for the whole year. One can add here the negative profits through the collective investments market. Following the results of the past year the pure funds’ outflow through all Collective Investment Schemes composed 168 million hryvnas. No financial system stood up to similar outcome, but the Ukrainian one – did. While and despite the actions of financial Regulators - the National Bank of Ukraine in the person of Vladimir Stelmakh and Securities and Stock Market State Commission (SSMSC) under the leadership of Anatoly Balyuk who actually destroyed with their actions everything the country had been working at during 18 years of independence - the trust to the financial system. 4

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he bank system is similar to “the heart” transferring money – “blood” through the economy from those who possess this money to those who need them. Nevertheless, owing to general distrust and first of all lost of FAITH in the authorities, Ukrainian banks have been wounded and blood is gushing from the wound – tens of billions have already flown away. And until this process is stopped the core of economy still remains exhausted no matter how much bloody money is invested into the bank system. What is the reason? First of all, in the actions of financial regulators of the National Bank of Ukraine and SSMSC. In particular, Vladimir Stelmakh forgot that Ukrainian population is not just a “biomass”, but the first-rate investor of the Ukrainian economy. Only during the last recent years people invested into the Ukrainian economy more than 200 billion hryvnas. And what did we get in substitution from the chief banker? During the year the National Bank of Ukraine revalued hryvna to 4,5 for dollar, then within the month dropped the rate up to 9 hryvnas having consolidated its vision of the financial market development with the help of declaring a moratorium on early withdrawal of deposits. That is why, one can understand people. Such steady distrust to banks and the National Bank expunged the whole financial market. But possibly, withdrawal of investors from the bank system is caused not by the emotions but on the contrary by good judgment. It is quite evidently that it is long of advantage and prefers shortening its positions waiting for the worst. Because, no one knows what to expect from Mr. Stelmakh. The current situation on the market as well as the activity of financial authorities highlights people’s rightness being concerned about new unpleasant surprises. Ban on deposits Position of the National Bank management occasionally highlighting for public new financial risks, is in assurance that everything is under the control (the nature of inflation is not monetary, all actions necessary for the stability are undertaken etc.). The independent comments give us more and more often apocalyptical forecasts. Analytics say that there are some objec-

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tive reasons which will cause the distrust to banks in the nearest future exactly because of the much talked-about “NBU moratorium” and it continues its negative influence on banking system and national economy even after it would be cancelled. “The moratorium on early withdrawal of bank deposits implemented by the regulator broke the main principle of cognitive psychology effect when investors and depositors don’t want to invest money where they have a negative investing experience” experts confirm. Though, according to the words of NBU Chairman Vladimir Stelmakh the moratorium on early withdrawal of investments did not exist per se! Formally, there was only NBU warning to commercial banks to take all measures on exclusion of early withdrawal of investments and this warning was treated as moratorium on early withdrawal of investments by the market. Finally, depositors again became the innocent victims when during seven months period could not return devaluating deposits! If we consider Vladimir Stelmakh words then the violations of the Ukrainian legislation were made by the bankers who were under National bank regulation. But at the same time the question arises: why did not National bank react to the bankers’ violations concerning the public rights of property on investments? The paradox of situation consists in the Decree #282, May 12th, 2009 by which the National bank wants to reduce investors fears regarding safety of their investments in the Ukrainian financial institutions and thereby to renew the trust to banking system. However, this is not so simple. As the citizens still remember all their financial losses in the early ninetieth… Obviously, the expected extremums where the reality will incline strongly depend on the ability of NBU management itself to estimate sufficiently the situation and consequently react to it. Unfortunately, these abilities need additional evidences. Thus, experts point out not only the limitedness of the resource base and instruments that are at the disposal of NBU but the professional inability of the NBU Chairman under current conditions. Standard & Poor`s Agency considers the National bank unlike similar institutions in Russia and Ka-

zakhstan for not active support of commercial banks in case of liquidity and default crisis expansion just because of the lack of necessary financial resources. Russian analytics in their turn consider NBU too much dependent on expectations for foreign banks supporting their Ukrainian subsidiaries (frankly speaking, NBU just hopes that everything become normal somehow). The foreign sources will not help. As the exceeding dependence of the Ukrainian banking system from the foreign capital only worsened the situation. One can not observe the stability of the system promised by the officials of the Ukrainian Central bank who sold foreigners the entry tickets to the Ukrainian market with the income of foreign capital. If to sort out, there were foreign banks which became the agents of many negative tendencies in the Ukrainian economy. Consumer crediting that was practically imposed by the foreign banks promoted the development of the other countries’ economies but not the Ukrainian one. The foreigners had no time to develop the civilized banking market in Ukraine. First of all one had to return money spent on the purchase of the Ukrainian banks… Crisis in Ukraine became to a large extant the result of “the soap bubble swelling” when foreigners were lending great funds to local companies and individuals with no attention to possible risks and then started returning their investments when understood that the real risks were much greater than they expected. Please, tell us, where West banks were able to give such rates as in Ukraine? And the share of the foreign banks makes up to 40% (if to be exact 37, 6% as of April 1st, 2009) of the country banking market. From the other hand, why was NBU not able to provide the Ukrainian economy with “long hryvna”? The reason is the same: lack of trust of private investors and depositors to the financial authorities. The Ukrainians do not invest their savings for more then 12 months period. THEY DO NOT TRUST ANYMORE! By the way, exactly the lack of “long money” in the Ukrainian economy is one of the reasons of such rapid retraction of Ukraine into the gulf of the world crisis. Inside the country

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there is no money with the investment period for more than one year. Today private pension funds do not have money at all, insurance companies’ average portfolio period – a bit more than one year, mutual funds – also about a year. In Ukraine business as well as state enterprises used to take “long” investments abroad but during crisis the international markets narrowed to national borders. This localization tendency of the capital employment is reinforcing in the world and that is why Ukraine has to “produce” its own “long money”. But there is a question: how? As nobody was engaged in the development of the financial and investment markets. For the long period NBU had been cherishing the banking sector in the hothouse conditions ignoring the market of the collective investments (bankers’ lobbying the Non-governmental pension funds’ income taxation). As a result, the investment funds market through which it could be possible to accumulate more effectively population’s resources did not turn into the alternative for bank deposits. The cause is the low development level of market infrastructure: the lack of just pricing mechanisms (stock exchange system) and investors’ rights guarantee (depository system). In Ukrainian legislation the reference on financial and investment market is only in the Constitution. But this is really only the reference that the activity of these markets is regulated only by the law. The laws on financial and investment markets do not exist in Ukrainian legislation. But the attempts to regulate the situation were undertaken long before the crisis. The programme developed by the State Agency of Ukraine for Investments and Innovations proposed the whole list of cardinal (in some cases – even radical) innovations and changes in the directives of fund market practically for all its participants. In particular, it was planned to unite and improve the work of the Ukrainian stock exchanges, to set up a single central depository (on the bases of the National

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depository of Ukraine) and a clearing house, to develop the law drafts “On investment banks” and “On venture funds”. Besides, one planned to create new financial institutions involving the government – ventures invest fund, innovation and investment bank and financial institution of municipal development. According to estimations of the developers after the programme realization the half of all bargains on securities should be settled on stock exchanges by the year 2012 (now this indicator does not exceed 5%). In addition the annual capacity of the exchange auctions will override $200 billions. The capitalization of the domestic securities market could reach 70% of GDP in five years and majority of players to be domestic institutional investors – investment and pension funds, insurance companies and investment banks. In particular, the assets of non-venture mutual funds according to the Agency’s forecasts should exceed 1 trillion hryvnas in 2012 and for instance the assets of non-governmental pension funds should exceed from some hundreds of million hryvnas to 190 billion hryvnas. Truly speaking, in order to provide the previous growth rates of the domestic stock market it evidently was not enough just a wish of the officials or market participants. It was necessary almost two billion hryvnas for the implementation of the programme of capital market development. According to the expected financing volumes during some years it was supposed to spend 1, 85 billion hryvnas, 1, 47 billions of which – resources of the state budget. Exactly such a great sum (or rather the lack of it in the budget) according to the words of CMU officials caused the cancellation of the decision of the previous government. At present we are to pay off sums exceeding tenthly the planned investments. Just for the recapitalization of problem banks in 2009 44 billion hryvnas are allocated in the budget. Money evidently was not the reason. Easily speaking, the Ukrainian underdeveloped stock market exists only because it is very

profitable for the group of banks, regulators, separate market participants which gain of it. According to the concept the capital market development required reformation of the system of the government regulation of capital markets and financial services. For the purpose of consolidated oversight it was supposed to create new special state authority – State commission on supervision on the financial institutions’ activity which had already been nicknamed as mega regulator. It was planned to give this commission the rights on monitoring the activity of the financial institutions, implementation of regulation requirements and standards, and also the right to inspect and apply penal sanctions. The perspective to remain without his position became a serious stimulus for Anatoliy Baluk, the Chairman of SSMSC to be the main opponent to the fund reform offered by the Agency. CMU did not stop on the cancellation of the fund reform plan. A specially created interinstitutional council which was responsible for the completion of a programme and controlled its realization including the budget expenditures was liquidated together with the document.

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However, the cancellation of one problem does not mean the appearance of alternative draft at all. During the following two years the State commission did not find time to prepare even some kind of its vision on the development of capital market. So it turns out that the regulators of banking and fund market which in principle is to be engaged in their development just imitated rapid activities. At the same time the imitation does not give any profit as well as seriously worsens (irretrievably damages) the development of the Ukrainian capital market. “Imitation” project One more reason for skepticism concerning the possible saving role of NBU in the future economic battles (perhaps, the main reason) consists in the fact that NBU is following its inner priorities not always coinciding with the actual monetary challenges. For instance, lately the lion’s share of NBU efforts is wasted on the promotion of a draft…of private All-Ukrainian Securities Depository (AUSD). For one thing, bewilderment is caused by the absurd situation when the private institution is created with 80 million hryvnas chartered capital by National Bank despite the legal prohibition for NBU to be the founder

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of the private companies. There is no sense to mention that the proclaimed purposes for creation of a new depository badly combine with the reality. Besides, the management of the National bank and Securities and Stock Market State Commission (SSMSC) actively promote an idea of AUSD creation and offer to pass duties on registration of government securities (now the depository of NBU is engaged in this process) and also corporate securities via merging with commercial MFS depository. As a result, the private foreign companies – SSMSC shareholders will get the access to the registers of owners of personal securities and per se will independently function as a central register for all domestic issuers. Though, if the interest of private founders of All-Ukrainian Securities Depository is quite obvious, so the position of financial regulators is not entirely clear. As according to the law “On National depository system…” the central element in the two level system of depository registration of securities in Ukraine is NDU, in the creation of which SSMSC and NBU took part. There is the whole governmental program on the development of the National depository system and also a number of President’s decrees which provide transformation of this structure into the fully functional central depository. But, it seems that officials of NBU and SSMSC are followed by totally other motives. For instance, the Chairman of SSMSC Anatoliy Balyuk who zealously defends the idea of the creation of central depository on the bases of AUSD apparently has to ignore President decrees on the strength of special relations with the advisor to the Prime-minister of Ukraine Alexander Ginzburg and Deputy Minister of the Cabinet of Ministers Georgiy Beradze. “The reform” of the stock market will cause not only the political dividends but the real incomes for its main ideologists. Frankly speaking, there is an impression that without NBU and SSMSC efforts new mega structure couldn’t be created. Another

question of what makes NBU to play on notown grounds, we leave without answer. As well as the main question of the moment: will NBU have enough forces and time to solve actual problems of Ukrainian economy, which unlike the national depository system are under the competence of NBU according to Constitution and laws? And whether the game on another field ends with the offensive goal in the own gate? Instead of the conclusion Any financial system is a certain litmus scrap of paper, the indicator of trust of people to the state. As for us this indicator went off-scale below zero long ago. And as soon as it starts mounting upwards something surely happens. And again we are at absolute zero. Why is it in such a way? “If the stars are lighted it means somebody needs it”. These are the words of Vladimir Vladimirovich – Mayakovskiy. Let us risk and paraphrase the great proletarian poet: if certain decisions appear this is also a profit for someone. And there is a huge space for fantasy: who exactly needs it, why exactly this is needed, what are the hidden and obvious consequences of necessary to the country decisions. The script writers – the National bank of Ukraine and Securities and Stock Market State Commission know this fact by heart. And the others that are you and me, in the next time are doing the classical puzzle of Ilya Muromets: if one goes straight – one will loose money, to the right and to the left - the same probability. Alas! Again, we can make unfavorable conclusions among all these events: as it used to be in Ukraine the private commercial interests of certain people prevail over the interests of all citizens. Just owing to this very reason during the five years period Mr. Stelmakh and Mr. Balyuk have been showing ongoing detective story online with the elements of action, thriller and a very scientific fantasy…in the given case – financial one.n

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MASTERS OF THE EPISTOLARY GENRE The management of National bank of Ukraine continues to make titanic efforts... on lobbying of the private commercial project on creation of alternative central depository. On these days rather indicative product of the epistolary genre which authorship belongs to the head of Ukrainian central bank Vladimir Stelmakh has been published. In the letter (№22-108/737-9521 as of 18.05.2009), addressed to National security and defense council of Ukraine, the main banker of the country «in black and white» without paying attention neither to the law, nor to common sense suggests to cross out with the stroke of the pen the results of 10-year-long work on creation of the central depository in Ukraine, thus palming off on a table of the top management of the country the doubtful business plan. However, it is not excluded, that Stelmakh was misled. Anyway one conclusion arises: The National bank is supervised either by liars, or by ignoramuses. Or - both. We ask: How is country going to overcome the crisis with such management of the National bank?

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kill in resourcefulness to lobbyists of the «AUSD» project in person of the head of the National bank Vladimir Stelmakh and the chairman of Securities and stock market state comission (SSMSC) Anatoly Balyuk can not be taken away. Their ability to convince the top management of the country that black is actually white, could be envied even by such infernal master of propaganda and the devilish PR-expert, as Goebbels. And though, as ancient Roman historian Tatsit spoke, eventually the lies by itself will dissipate, authors of the business plan on creation of All-Ukrainian Securities Depository do not despond, in every way trying to turn business as soon as possible. A vivid example to that are the first business operations of the new depository – they did not yet raise money but already wasted them on real estate purchase (more than 60 % of AUSD’s authorised capital has been spent for acquisi-

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tion of two private residences and a land plot). Apparently, the declared purposes and real «achievements» do not always coincide. And in the history with the «AUSD» project they are absolutely not compatible concepts. The history of AUSD birth testifies not about banal occurrence of «the third central» as journalists have entitled their publications. And at all not about creation of the uniform depository which would transparently work under the international standards, deciding one of the key problems of low investment attractiveness of Ukraine in the stock market. That zealously declares on public Stelmakh’s adviser, the head AUSD supervisory board Vasily Rogovoj, and for some reason for better persuasiveness his chief has forgotten to mention this thesis in the letter. No, it is faster attempt to cross «snake and a hedgehog» market institute with the status «All-Ukrainian» (and there already close to «central») with a commercial enterprise the control over which

is carried out not at all by the NBU. The list of the «project’s» authors is quite narrow and also well-known. Only the fact of existence of the National depository of Ukraine (NDU) interferes. The fact of legal existence of lawfully created central depository spoils the whole picture: the place is taken. The central depository after all is already created on the basis of NDU, «is equipped” and capable to function, covering without problems all requirements of corporate sector of economy. It is obviously known both in SSMSC and in the National bank, therefore hastening to realize the alternative project. Thus providers of national depository systems repartitioning process absolutely the current legislation. However, it is in the order of things in Ukraine. A novelty is active participation in unlawful actions of those who is obliged to struggle with legislation infringements: SSMSC and NBU. Yet no frauds in the stock market had such a firm «roof». From first lines of the «composition» by

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financial NBU’s its true purpose becomes obvious - to eliminate the main obstacle on a way of cardinal reformation of system of the investors’ rights accounting in Ukraine in favor of private structures with foreign capital. The obstacle in person of the National depository of Ukraine,

tion infringements from the side of the National depository. So, why are two financial regulators so angry with the National depository of Ukraine, that in Vladimir Semenovich words holds only 0,75% share of the depository services mar-

86 % of which shares belong to the state. For this purpose in NBU have not brought up anything more original, than to accuse top management in corruption. «... activity of the National depository of Ukraine despite of tens millions of assignations from the state budget that were assigned for the development of this depository did not lead to adequate development of relevant infrastructure... Furthermore, by revision of the Main Control and Revision Office of Ukraine (CROU) found misuse by the depository of millions of budget funds” – is told in the Stelmakh's letter. However, according to NDU, for ten years of its existence the depository was checked dozens of times, including six times by Main CROU, twice by the Audit Chamber and more than twenty times by other public authorities. And no revision couldn’t reveale any misuse of budget funds, or any other abuses or legisla-

ket? The answer to this question is outside of the usual understanding of the role and functions of the central depository. The point is that NDU functions as central depository actually have nothing in common with its market share in commercial services. Just the same as small volumes of commercial services granted by the National bank (under this parameter NBU holds one of the last ranks in Ukrainian banking system), in no way prevents NBU to execute its function of a central bank of Ukraine. But there are, at least, two reasons of officials’ «dislike» of NDU, and they are connected with a number of functions which essentially impair departmental interests of regulators of the banking and stock markets. The first - the central depository created on the basis of NDU under the law is responsible for standardiza-

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tion of depository accounting in the country i.e. as a matter of fact acts as a regulator for participants of depository system and SSMSC until now does not want to accept it, ignoring NDU standards and continuing to regulate the market with its internal regulations. The second - central depository should serve accounting for state securities which now are served by the National bank. It is natural that NBU officers do not hasten to give out this «market», since as collateral of the same internal state loan bonds are allocated the fabulous sums in the form of recapitalization of commercial banks. What does Mr. Stelmakh suggest or, to say more correctly, insist on? Apparently, the letter does not contain real offers, being as a matter of fact a certain report of the work done by NBU. We quote literally: “In this situation SSMSC and the National bank, stock market participants, under approval of the President of Ukraine, initiated the creation of new legal entity with transparent structure of share capital with participation of state”. It is remarkable that any initiative on creation “the new legal person with transparent capital structure with the participation of state” was not actually expressed neither by SSMSC, nor NBU, especially nor by market participants. On this background, the assertion of the author of the letter that creation of AUSD is supported actively by the President of Ukraine Victor Yushchenko, at least, looks a little strange. From details of earlier published in a press correspondence between ideologists of the new depository with the head of the state it is known that there was no conversation about any creation of a separate commercial enterprise. The only thing with what the President agreed was to expand sphere of authorities of the National bank on depository service of corporate securities. However, instead of that, the National bank, under active participation of SSMSC, initiated the creation of new commercial structure in the form of open joint-stock company. Thus it is difficult to call the AUSD’s structure of share capital «transparent» as the majority of commercial banks participated in it under obvious pressure of a regulator about what repeatedly wrote mass-media and declared participants of a stock market, that are not controlled by NBU. Furthermore, placement of AUSD’s stocks of additional issue (73,1 million UAH) is planned as a private placement – i.e. among certain circle of participants as a result of unofficial arrangements unknown to

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V.S

tel

mak

h’s

let

ter

For ten years NDU history it was checked dozens of times, including six times by Main CROU, twice by the Audit Chamber and more than twenty times by other public authorities. Annually NDU conducts independent external audit including PWC audit. Last check of Main CROU and Audit Chamber was in 2008. By results of revisions of financially-public work of the depository no revision has revealed any misuse of budget funds, or any other abuses or legislation infringements from the side of the National depository.

Participation of NBU in authorized capital of AUSD is not participation of the state. Moreover, there are no reasons to believe that structure of AUSD’s share capital is «transparent» as its creation occurred under the pressure of NBU and on the basis of acceptance of unofficial decisions, and placement of stocks of additional issue is declared as «private placement». Article 71 of the Law of Ukraine «On the National bank» forbids NBU to be the shareholder or the participant of banks, the enterprises or establishments, which work is not connected with maintenance of its activity. On fulfillment of this norm of legislation NBU left structure of shareholders of two other depositories created in the form of open joint-stock companies - the National depository of Ukraine and the MFS Depository.

For creation or acquisition of modern program-technological complex of AUSD 80 million UAH was not enough, additional 73,1 million UAH are planned to invest. For comparison NDU created a program-technological complex of the central depository having spent only 33 million UAH.

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63,75 % of the chartered capital of OJSC All-Ukrainian Securities Depository were spent for acquisition of the indicated land plot and two not completed residential buildings in Kiev (51 million UAH). The analysis of offers on real estate market for that period (END 0F 2008) testifies that the price for acquisition is 1,82 times above average. Furthermore, the price of the identical buildings acquired actually simultaneously, essentially differed that testified absence of competitive selection, squandering or the partiality of AUSD’s management: one was purchased for 13,8 million UAH, another - for 32,2 million UAH, that differed more than twice.

The aforesaid testifies that the Ukrainian office of the US Agency on international development (USAID) continues its destructive activity on development of market infrastructure in Ukraine, in particular counteracts to creation of the central depository on the basis of NDU as it is provided by the Ukrainian legislation.

The draft law provides creation of the central depository on the basis of the depository created with participation of the National bank, without clear definition of the accurate mechanism of creation of the central depository (at present such criteria are completed only by non-operating AUSD). That is, authors of the draft law lobby interests of specific private project.

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A.B

aly

uk’

s l ett er

Instead of proposed expansion of NBU’s activities on depository service of corporate securities, NBU with active participation of SSMSC initiated the creation of new private structure – OJSC AllUkrainian Securities Depository (AUSD)

Since 2007 controlling stake in UICE belongs to off-shore company Oakcroft Investments Ltd (BVI), connected with Alexander Ginzburg, the owner of uniquely authorized by SSMSC rating agency “Creditrating”

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financial the public. Another document which eloquently testifies active participation of SSMSC in wide scale operation on misinformation of the top management of the country has got to journalists’ possession last year. It is the letter of SSMSC Chairman Anatoly Balyuk to the President of Ukraine Victor Yushchenko (№ 100/18915 as of November, 27th, 2007). In order to adequately evaluate this indicative official product of an epistolary genre, it is necessary to make a small preamble. At that time the national media actively discussed dizzy stunts in bureaucratic destiny of strategic prospects for national economy document entitled as the Concept of the state program of Ukraine capital market development. Let's remind that the Concept developed by The State Agency of Ukraine for Investments and Innovations (State investments), offered the country accurate strategy of the ripened reforms in investment, stock exchange, depository and innovative spheres of economy, in parallel formulating the developed technical project on creation of corresponding mechanisms and tools for realization of transformations. Having passed comprehensive discussion in the expert environment, having met the approval of the majority of professional market participants, the Concept definitively acquired the official status after its assertion in autumn of 2007 by the special decision of the government. But the good news ended with it. Timoshenko’s Cabinet of Ministers, referring to deficiency of budget funds (though corresponding starting financing was provided only by the budget of 2008), unexpectedly cancelled the decision of the predecessors, without stating any substantial claims to the document’s text. After the long period of general shock, the President interfered with a situation, vetoing the corresponding decisions of Cabinet of Ministers by his Decree, with simultaneous submission of disputable documents to consideration of Constitutional Court. The juiciest point in all this story is that coordinated attacks on works and proposals of the State Agency of Ukraine for Investments and Innovations (and these attacks are not limited to conceptual disputes) led by their initiators under cover of a name of Victor Yushchenko, constantly referring that they act under direct commissions of the President. To tell the truth, such assertions initially looked unpersuasively. At least for the reason, that exactly Victor Yushchenko was the

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initiator of establishment of State investments, and it has been created by his Decree in the end of 2005. Besides, the President repeatedly personally expressed on actual, including highly specialized, questions on functioning of capital markets in Ukraine. And his estimations always coincided with conclusions of the special state body (State investments) created for reforms in this sphere. Several Presidential commissions were transferred to decisions of the National Security and defense Council of Ukraine, and there were no contradictions with the position of State investments. At the same time some doubts remained, as it was difficult to believe that officials of a rank of A. Baliuk can attribute to the President point of view which he did not state. Here again it is a high time to return to the letter of SSMSC’s head. The letter illustrates well the mechanisms of misinformation of professional community and public opinion as a whole, or, we will say more softly, distortions of the President’s position for the subsequent giving to interested public of «favorable treatments”, with passing of the incorrect information to the highest officials of the state. Formally, the letter is about future of national depository system. For that time process of creation of OJSC All-Ukrainian Securities Depository (AUSD) already became more active. This project since the moment of the occurrence on the market choked in benevolent attention of the highranking lobbyists. In particular, 20 million UAH in the authorized capital of new depository was transferred by the National bank of Ukraine, though the legislation directly forbids NBU to hold shares in other business companies (by the way, for this reason NBU has earlier quit the structure of NDU founders). Actually nobody hides plans of creation on the basis of AUSD Central Depository of Ukraine, having transferred to it the rights to registration-depository servicing of both state, and the most attractive corporate securities. Also it is not excluded that the true purpose of aggressive advancement of AUSD – to obtain unlimited access to the confidential information on proprietors of securities of domestic issuers. And everything would be good for Ginzburg and his partners if all with no exception valid legislative documents provide creation of central depository on the basis of totally different institution - namely, the National depository of Ukraine, 86% of which belong to the state. To eliminate this «small, but principal mis-

understanding» was mentioned-above Balyuk letter to the President. It was necessary to receive any approving visa of the head of the state. All the rest were just “naked techniques”. So, in his letter head of SSMSC «ascertained» a definitive failure of the project under the name «National depository of Ukraine» and suggested the President to expand a field of activity of NBU’s depository. At the same time, contrary to the statement of the author of the letter, National depository was created and already functioning, while NBU’s depository or at least corresponding software and hardware were not present in the nature. There is only a small group of experts who were engaged in the accounting of state securities. The President, who apparently could not even imagine that he was simply misinformed, also agreed with this offer. As the next step, a gossip was launched on the market about existence of secret correspondence between A.Baliuk and V.Yushchenko where the President of Ukraine initiated the creation of central depository on the basis of private AUSD. After this «information» settled in the necessary heads, time for its realization came. And in February, 2008 in interview to the newspaper «Businessman Ukraine» SSMSC’s head declared that «AUSD is created at the initiative of President Victor Yushchenko for acceleration of process of securities transformation in the uncertificated form… It will be the Central depository. There is already an agreement with NBU that its depository will pass the accounts of all state securities to newly created structure». As it is written in Math textbooks QED which means “quod erat demonstrandum”! By the way, after the letter to the President, A.Balyuk directed the message also to the Cabinet of Ministers, suggesting to cancel (as wrong) the state program of national depository system development accepted in 2005, thus very “consistently” mentioning in the same place that substantive provisions of this program by the present moment were almost completely realized. A question arises: whether the similar method was used to cancel the Concept of the State program of capital markets development, which the President has been forced to subsequently uphold? And more: how long the Head of the State will accept that on his behalf his own decisions are cancelled, without even informing him? On the exact answer to these questions depends, without superfluous pathos, the future of national capital markets. n

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Future is fatal, outcome is lethal? International operators dealing with exchange and depository business show interest in Ukrainian capital market despite of its underdevelopment. Taking into account all the potential of Ukrainian market, they are striving to acquire the key infrastructural institutes in the country. If such a tendency preserves, it is only the matter of several years for the existing stock market infrastructure – exchanges, depositories – to turn under complete control of international investors. In such way Ukraine will be deprived of its financial independence.

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t is hard to find another country in the world so deeply influenced with crisis as Ukraine. As it proved, Ukraine fails to deal with crisis effect in the financial sector as well as in economy. It lacks not only professional managers at the head of National Bank and SSMSC, but also its guiding line for development – a strategy for the bank and stock markets development for a long-term perspective, a plan of withdrawal from «Economic miracle», which is endlessly moving down so far. Contrary to common sense, Ukraine exists in a somewhat different frame of reference, where the present developments exclude previous achievements. How success of the ship named “Ukraine” may be achieved if its course hasn’t been set and its leading crew has a mentality of average sailors and cooks, which got by a chance a possibility to guide a ship? Too primitive scope of state ‘managers’ thought keep them from setting the strategic direction for Ukraine adequate to the challenges we face. Subsequent to collapse of bank system, Ukraine looses the remains of its competitiveness on international capital market. Failing to become the full-fledged participant of international capital market, Ukraine is being turned into control of major international operators of exchange and depository business. The denationalization of exchange and depository system has all the possibilities to outrun the same process in banking sector.

Is it good or bad? Neither of experts may answer for sure. Of course, the integration of the Ukrainian stock market into international capital market is marked with indisputable advantages – modern technologies, transparent rules, investments. However, the banking sector example makes us think over the matter seriously whether Ukraine should sell to foreigners such key infrastructural elements as exchanges and depositories. Several years ago, before mass international capital began flowing into bank market, discussions on the real benefits and hidden threat of such international institutions activity for national economy were taken not seriously by National Bank officials as well as by bankers, who were just striving to gain their profit on a sale of their business to international investors. Today more than 40 per cent of banks is controlled by non-residents. Even so six of ten major banks in Ukraine are foreign or acquired by foreigners. Ukrainian bank sector is likely to be non-Ukrainian anymore if such a tendency keeps on. On one hand, the arrival of foreign investors on Ukrainian bank services market is an objective and irreversible process – national financial institutions are not able to rival

them as equals yet. On other hand, might the statistics mentioned above have been less oppressive if officials from National bank calculated not only the ‘plusses’, but also the ‘minuses’ of the foreign banks’ activity in Ukraine? Thus the promised credit rates reduction

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at the expense of foreign mother banks’ inexpensive resources are not seen in action. Quite the contrary – credits are more expensive now. At the same time except for granting credits to Ukrainian enterprises foreign banks are more willing to get profits from expensive consumer crediting. In such way they stimulate population to eat away their savings and to finance Ukrainian import. The same situation can be found at the stock market today. Our stock market fails to fulfill its main task – redistribution of resources from investors to corporate sector which maintain investment projects for real economic sector revival. In other words, domestic industry and enterprises, sharply requiring investment for development have nothing to do just to observe enviously as their foreign rivals get relatively cheap additional capital, placing their securities at stock exchanges. The reality is that foreign portfolio investors still consider Ukrainian stock market as an

enormous puzzle. Contrary to the diffused opinion that lion’s share of investment in securities of Ukrainian issuers belongs to foreigners (according to Ukrainian brokers, about 90% of deals with securities on the market are conducted by the non-residents). Still there are too few strategic western portfolio investors that have already decided to try investing in Ukraine. In addition to that, absence of high-quality financial instruments, of clear regulation as well as excessively high risks connected with lack of any guarantees for purchase and sale deals and

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financial property rights problems create ideal conditions for prosperity of wild market in Ukraine. It brings incredible profits to certain dealers. At the same time population, which might have been the hugest inner investor, has nothing to do than to hide their savings under the brick or at the best way on the deposit bank account that, as we known, can be fraught with risk. The whole pessimistic picture can be confirmed with the real numbers: trading volume of the securities on the organized stock market in Ukraine does not exceed 4-6 per cent of all the security deals from year to year. The rest of the deals are conducted over the exchange. That means that lion’s share of Ukrainian stock market remains in the shadow today. Given the fact that Ukraine has ten stock exchanges! The efficient and reliable stock market infrastructure might and must have been created long ago. As far back as at the beginning of 90th European Community granted the real technical support to create full technological cycle of national capital market – unified ex-

change, central depository and national central payment agent (settlement bank) on the basis of National Bank. Nevertheless the process of national enterprises privatization wasn’t held at exchanges and this project had been buried as not wanted. Later, in 1995, Verkhovna Rada approved the Conception of Stock Market Creation and Functioning in Ukraine, which also claimed the necessity of exchange trade centralization as well as of centralization of depository system. Though, in 1996 – 1997 years United States Agency for International Development (USAID) initiated the technical aid project for creation of over-the-counter trade informational system PFTS, which turned to be an alternative to ‘traditional’ exchanges. From the moment PFTS started its activity exchanges have lost any competitive advantages, as strict exchanges rules could be ‘evaded’ by using PFTS informational network. As a result, in order to improve activity

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indicators, Ukrainian exchanges may put considerable part of deals with securities out of the shady turnover. As for developing state such as Ukraine is, the share of the exchange deals in all the deals with securities has to be not less than 30%. However the serious obstacles for Ukrainian stockbrokers are the lack of modern trading and settlement technologies. Anyway, the rearmament race of Ukrainian exchanges took its dynamic phase. Thus there is no use for market participants from permanent claims by exchanges on

their intentions to develop trading systems. The exchange and depository updating requires considerable investments. As the last years practice shows, market participants are very unwilling to allocate their money for the stock market infrastructure. The serious catalysis for the escalation of rivalry between the domestic exchanges appeared to be the Russian platform RTS, which has been striving to get piece of Ukrainian securities market for a long time. After RTS’s negotiations with PFTS and INNEX stock exchange had failed, Russians decided to try another and more difficult way. They started creation of Ukrainian trade platform from scratch. Together with Ukrainian brokers they established OJSC “Ukrainian Exchange”. 40% of shares in new exchange belong to Russians. Warsaw stock exchange (WSE) chose INNEX exchange as an object for purchase. With RTS or WSE coming into Ukrainian stock market the position of its current leader PFTS exchange could be seriously shaken. Market participants admit if PFTS doesn’t update their technical capabilities, it may loose considerable part of deals concluded at the market. If all current deals move to the new exchange, PFTS is likely to be forced to terminate its activity. However, PFTS is not willing to give up. There has already been introduced new trad-

ing system within the framework of «MICEX - NASDAQ OMX - PFTS Ukrainian Project». NASDAQ OMX is the owner of the software, and property rights on trading place supporting software belong to the Moscow interbank currency exchange (MICE). It is possible, that eventually MICE will be one of the PFTS shareholders. Owners of Ukrainian interbank cur-

rency exchange (UICE) decided to take part in the rearmament race. They announced signing the agreement with NASDAQ OMX that envisage the development of modern trade system project for UICE. Actually, NASDAQ OMX refrains from comments on this matter. Remarkably, the fist to reach the agreement on Scandinavian exchange group OMX participating in Ukrainian stock market development project were National Ukrainian Depository (NDU) and State Agency of Ukraine for Investments and Innovations. At the beginning of 2007 State Agency of Ukraine for Investments and Innovations and NDU came to agreement with OMX Technology (subdivision of OMX group) on taking part in capital market development as supplier of technical decision for NDU and other system institutions. Swedish adviser from OMX together with other foreign advisers - Octagon Advisors Company (Singapore) and Thomas Murray (Great Britain) - took part in preparation of the Concept of Ukrainian Capital Market Modernization State Program. According to the Concept, in particular, it was provided to finalize full-range central depository establishing on the basis of NDU. Subsequently, to tell the truth, this document was cancelled by the Cabinet of Ministers headed by Yulja Tymoshenko. It’s seems like National Bank management and UICE took over from State Agency of Ukraine for Investments and Innovations and NDU not only the initiative on central depository creation but also one of the key foreigner partners. As well as in banking sector, the swift entry of foreigner capital into stock market infrastructure is actively assisted by its regulator

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financial Heart of the law The point of the law is that the alterations mean the following. The previously existing norms prohibiting admission for public placement and/or circulation of foreign securities at Russian market are terminated. Until now in accordance with paragraph 1 article 51 of the Federal Law On Securities Market it has been possible only under international agreement or if there is any agreement in force between the federal executive body for the securities market and appropriate body of the foreign issuer's country. There is only few such agreements (Belorussia, Brazil, One way ticket... to Moscow Nevertheless UAE, Cyprus, China). As it was mentioned by the source of threats is not only within the the draft law authors, any attempt to conclude country, but outside also. In particular, since such agreements were met by foreign regulators with formidable resistance. No wonder... the 29 of April Ukrainian stock market has Nowadays we have no such requirement, received a chance to remain in crisis forever. but there are some criteria concerning state, Signed by Dmitry Medvedev on the eve of issuer, securities and procedure of its input May Holidays Law of the Russian Federation into circulation. on admission of foreign securities to Russian Particularly, the issuer's state should be a exchanges opens new page in the process of member of Organization for Economic Co-opUkrainian stock market development. It may eration and Development (OECD), a member be the last page. or observing member of Financial Action Task On the 17 of April Russian Parliament acForce on Money Laundering cepted the Federal Law number It is only the matter of several Group ('A') and/or a member 504019-4 On Alterations to the of Committee of Experts on Federal Law On the Securi- years for the existing stock the Evaluation of Anti-Money ties Market and article 5 of the Federal Law On Protection of market infrastructure – exchanges, Laundering Measures and the Rights and Legitimate Interests depositories – to turn under complete Financing of Terrorism (MONof Investors on the Securities EYVAL). There is no need to Market (regulates the issues of control of international investors. point out that Ukraine meets securities placement and cirthis criterion and fulfills the culation in Russian Federation). On the 29 of free resources decreased, capital was leaving requirements, sometimes with exaggerated April it was announced that Russian president Russian markets not in order to pursue more zeal. signed it. As there are convincing grounds to significant growth, but for self-preservation Foreign issuers’ securities are admitted assume that ‘foreign securities’ mentioned in purposes. Even the meaning of ‘regional fi- for placement in the Russian Federation unthe law mean Ukrainian securities for the most nancial center’ has changed slightly. der condition of the emission registration by part, it is useful to analyze the main provisions Formally, reasons for passing the draft law Federal Financial Markets Service (FFMS). of this law and its possible consequences for hasn’t changed, but it can be assumed that its Such securities must also be assigned to inour stock market. implementing was caused by the following in- ternational securities identification code (ISIN) tentions: and to international classification for financial On reasons The fate of the law starts from 1) striving to widen rubble’s zone and for instruments code (CFI). the middle of December 2007, when only the rubble to get the regional reserve currency And the topmost. Foreign issuers’ securimost far-seeing and some alarmist could pre- status; ties are admitted to public circulation in Russia dict further crisis, oil prices were raising as 2) creation of additional mechanisms for only after Russian stock exchange has made well as Russian government’s ambitions. At protection of Russian assets acquired in the a decision on their admission into trading. In the moment of draft law submitting a range pre-crisis period on the territory of neighboring its turn Russian stock exchange makes such of reasons for its appearance has been made states as well as those being acquired now. decision after foreign securities has been public. In fact, transformation of Russian finan- It is significant reason as in some neighbor- listed at stock exchange enrolled in the list of cial market into ‘full-weight regional financial ing states raider attacks are inherent feature exchanges approved by FFMS in line with cricenter comparable with Germany and Switzer- of state policy; teria also established by FFMS. land' was put at first. Taking into consideration 3) cutting of liquidity deficiency in the fiNote two points. There is no requirement the fact of intensification of market regulation nancial system of Russian Federation caused for foreign issuer and foreign exchange, proin USA after 1997-1998 crisis, the intention by raw materials prices going down and capi- viding 'initial' listing, to be necessary located to redistribute the foreign securities flow from tal withdrawal by foreign investors. at the same country. 'International stock exUSA to Russian exchanges was shown. At the So reasons are understandable and could change' is mentioned in the law in singular. If same time the task was set to liberate Rus- be taken as patriotic, but how does it concern securities are delisted at the 'initial' exchange, sian market regulation so as it would be not us? its circulation will be terminated at Russian ex-

– Securities and Stock Market State Commission (SSMSC). Frequently it lobbies plainly individual interests of some market participants So if everything is left as it is now - if government doesn’t turn to enhance the competitiveness of their domestic capital market promptly, in several years the existing stock market infrastructure – exchanges, depository would be passed into the control of foreign investors, Ukrainian issuers securities would be circulating abroad. And this is nothing else than the menace to national security.

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tougher than it is in the USA, in Europe or in any of the emerging economies. Besides such global ambitions, there were more utilitarian reasons. At those times there was a rapid rise of free investment resources at the disposal of Russian businessman; most part of it was being invested into foreign financial assets. The volume of direct and portfolio private investments as for the 1 of January 2007 reached $220 billion. It is worth mentioning that by that time Russian Federation has already been on the way of liberalization of its currency legislation and most of prohibitions on capital export and investment abroad had been removed. In such a way, Russian authorities (unlike Ukrainian) draw their attention into huge money flow, passing through its economy. They undertook solving the dilemma: to limit capital flow on one hand and to avoid imposing direct export bans on another. The implication of the draft law was not affected by the ‘crisis’, which burst out of the blue. It took only one year for this draft to become a law. Despite reasons for its implications hasn’t changed for this year: volume of

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Takeover plan of Ukrainian stock market infrastructure change too. Decision by Russian exchange on admission of foreign security to trading is being made on the grounds of application submitted by issuer or broker which 'signed foreign issuers’ securities prospectus'. Then registration of rights on securities is held by Russian depositories, which open account at foreign company conducting securities rights registration and enlisted by FFMS. Notably, there is no such requirement that issuer and foreign depository are to be located at the same country. And again singular is used. So we have rather simple procedure. Some Russian company – broker – may initiate securities circulation of some Ukrainian issuer at Russian stock exchange without its consent. Consequences Let’s try to analyze the consequences of such law for definite Ukrainian stock exchange actors. Let’s follow the most pessimistic scenario. Given the present ability of Ukrainian authorities to resist unfriendly external influences (as for example relations with Russia) as well as structural transformation which are being seen worldwide resulted from global crisis, exactly such scenario is to be followed. Banks. We regard them as serving cash flow in order to support stock market operations. Cash flows include hryvna flows inside the state, currency flows going abroad in course of purchase of the securities possessed by non-residents, and the most interesting - incoming currency flows form securities purchase by non-residents, especially by real foreign institutional and portfolio investors. Among them the significant role has been played by Russian investors until recently. This segment is the main subject the law deals with aiming to turn the third group flows into Russian banks. In that case Ukraine looses considerable volumes of international investments. Besides, following the relocation of deals with Ukrainian securities into Russia, Ukrainian speculative investor's capitals will shift to Russia as well. It will reduce the liquidity of Ukrainian market. Such investors will turn to our banks only once - while withdrawing funds from Ukraine. Subsequently, given the Ukrainian legislation on investing abroad, this capital will be accumulated in Baltic, Cyprus, Switzerland, and Hong Kong. Of course, we may hope that most of Ukrainian

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issuers would hold successful IPO's at Russian platforms and would return funds gained into their motherhood. It is unlikely to happen at the nearest future. It is a pity to note, but our banks are left aside. Issuers. At the first glance, Ukrainian issuers receive additional opportunities: easy access to external financing, additional premises for IPO and drawings against securities. But, as it was already mentioned above, the time changed, and Russian Federation needs financing for its own needs and we doubt that situation will change soon. On the other hand, control or at least information on shareholders capital structure slackens and buying-up of shares may be realized out of range that may result in “unpleasant surprises”. Exchanges. The situation is ambiguous for many Ukrainian exchanges. On the one hand, someone gains additional piece of bread providing “primary” listing and at least visibility of securities circulation in Ukraine. Though according to the Law, exchange of “primary” listing and security that passes listing procedure may belong to different countries. There are a big number of islands in the world with warm climate and liberal laws and there is a possibility of creating a small exchange “on paper” in case when someone finds it too expensive to deal with real Ukrainian exchange. We already have such precedents. On the other hand, it is necessary to be included in Federal Financial Markets Service (FFMS) list and it may be only

one position for Ukrainian exchange (current version of the Law). Besides, included in this list exchange will have one more regulator – FFMS – as it is an authorized institution for setting up criteria for inclusion and, therefore, exclusion from the list. It will be necessary to build up from the ground relationships with Russian authorities, first of all with FFMS, where the rules and traditions are a bit different. Considering our exchanges’ level of resources (financial, administrative, lobbying) we may assume with high level of probability that the questions in Moscow will be solved without their participation. In fact, everything will end with typical for Russian Federation competition between Moscow Interbank Currency Exchange (MICEX) and Russian Trading System (RTS). If we take into account draftsman’s skeptical attitude to derivatives (their inefficiency was named as one of the reasons of the draft law), and also derivatives market being RTS patrimony, we may assume MICEX victory in this competition. In Ukraine, this competition will reflect in strengthening of the business struggle between PFTS Stock Exchange and young “Ukrainian Exchange”, presumably in favor of PFTS Stock Exchange. However, it may happen that PFTS will lose its independence and become a regional office of MICEX. Depositories. National Depository of Ukraine is the only depository that allocates international identification codes to Ukrainian

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financial securities (ISIN) and may establish corresponding accounts with Rus- but there are impossible to follow norms. Absence of legitimate ways sian depositories where Ukrainian securities will circulate. Therefore, together with capital and interest for investing create fertile grounds for political will of Russian legislators may influence smoldering Ukrainian bright but short blossom of “financial pyramids” of different types. depositories merging processes and establish a dominant position for Regulators. The Law will not make life of Ukrainian regulators, first NDU in the market. of all SSMSC, easier. On the one hand, all Ukrainian securities wherCustodians and registrars. This market segment suffers the ever they circulate become legal entity only after their allocation. On the strongest hit. These institutions are servicing securities circulation ex- other hand, the changes will happen not only in structure of Ukrainian ceptionally on the territory of Ukraine. With the decline in circulation stock market, but also in controlling mechanisms – exchanges and devolume of these operations, majority of them will hardly survive. Those positories become dependent to certain extent from Moscow authoriwho will remain, will service circulation of securities that are of no inter- ties, i.e. Ukrainian regulators need to build relations with them not loosest for foreign investors. ing their independent status. And this is not easy at all. Traders. The most mobile part of Ukrainian stock exchange market will face significant difficulties. Till recent time, their profits were formed Conclusions Surely, described scenarios and consequences are with servicing foreign investors, commonly Russians. Obviously, hav- not events of the nearest future. Based on previous experience, we ing choice, Russian investors will prefer to work on Russian exchanges may see first visible changes in 1,5-2 years period. Surely, the realand foreign investors will enter the market via trading platforms with ity will not coincide with the forecast. But there is an unquestionable higher level of liquidity and liberal currency regulation, i.e. again via fact – the Law was passed. For its realization it is necessary to sign big Russian exchanges. If Russian legislators implement their number of subordinate legal acts, to rearrange management plans into reality, we couldn’t envy Ukrainian traders Absence system, and to coordinate interests of parties involved. at all. On the other hand, some Ukrainian traders Actually, Ukrainian securities circulation needs acare now trying to work with Russian securities cumulation of significant stakes in the hands of high-quality financial on Russian exchanges. But these operations of Russian operators (what is actually is goare made with own resources and follow- instruments, of clear regulation as well ing on now). And this process also needs ing own interests. Ukrainian clients’ capital time. But we speak about global trend that stake on Russian exchanges is quite in- as excessively high risks connected with lack Ukraine couldn’t resist. significant. Due to the peculiarities of our That’s why Ukrainian professional currency legislation, Ukrainian traders are of any guarantees for purchase and sale deals market participants need to adapt to the not allowed to work in Russian Federation trend: to study mechanisms, schemes directly. They are obliged to enter the marand ways of accessing foreign exchangand property rights problems create ideal es, to explore local peculiarities and legket via controlled non-resident companies that are serviced by Russian brokers, i.e. conditions for prosperity of wild market in islation, to establish partner relations, and to reorganize own organizational structures. they do not have direct access to the market. But such adaptation is not enough. The The cases of obtaining license for professional Ukraine. It brings incredible profits threat is significant and the threat is not only for activity on Russian stock market for companies profits of investors in Ukrainian securities, but for the with Ukrainian origins are extremely rare. If the situato certain dealers. whole system of Ukrainian capital market as the flow of tion remains the same, Ukrainian traders will be put aside foreign investments will go down, the collective investment schemes from Ukrainian securities trading. Institutional investors. The situation in this market segment is and private pension funds may collapse. It is possible to specify a key factor for these threats – Ukrainian more threatening. On the one hand, investment funds that actively attracted capital of individuals for investing in Ukrainian securities, at the regime of currency regulation. Archaic bans and criminal responsibility moment “laid low” and are trying just to survive. Even after the crisis for accounts in foreign banks, overpowering restrictions for investing ends and market recovers in the nearest future (that is also in itself in foreign assets (that may broaden also to domestic) must be revised quite unlikely), they will face credibility gap of private investors who in the nearest future. All market participants including regulators must won’t forgive their money loss in the nearest future. Ukrainian securi- concentrate their efforts on solving these issues. If the announcement on opening of Russian exchanges was widely ties circulation shift to Russian exchanges will be a serious hit over institutional investors. The situation is dramatized by the impossibility covered in media, small Chinanews message of the same 29 April about for collective investments schemes to use offshore vehicles for entering intentions of Chinese authorities to open Shanghai stock exchange for foreign markets. This is also a critical issue for private pension funds as foreign securities passed unnoticed. In vain. This exchange till recent they are not allowed to invest outside Ukraine completely. Therefore, times was considered to be the most shut in the world with very strict decrease in number of Ukrainian securities in the market may cause listing rules but with the high level of liquidity. This “opening” may be absence of investment targets for pension funds. Together with ongo- considered as a fact supporting the changes of China in the world and ing crisis in banking system, existence of private pension fund system in financial system in particular. Dominating role of China in this region itself is doubtful. And this is a question of social stability and national become more and more vivid and we may suppose that specialists from Hong-Kong, Singapore, Australia and may be Japan treat this event in defense. Private investors. There is a group of people in Ukraine who may the same way as their colleagues in Ukraine do. We all are the witnesses of structural transformation of the world be considered due to their activities as private investors despite the crash of mutual funds and frozen deposits. They will show these activi- financial system that include rearrangement of regional influences on ties further on even if Ukrainian securities move to Russian exchanges financial markets. New “aftercrisis” world become more vivid and there and follow them. The only point here is that Ukrainian citizens do not are no doubts that Ukraine will need to struggle for a place in this new have legitimate ways of invest abroad. There is no exact prohibition, world and preferably with new regulators. n

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In Media Monopoly game Yulia Timoshenko finished “in advance” stock market reformation that cost 2 bln UAH. Cop-out for previous government decree cancellation was lack of financing necessary for market development and the conflict of interests with the Head of State Agency for investments and innovations, Mr. Viktor Ivchenko. InvestGazeta, 03 March 2008 Conflict of interests: now in capital markets Contradictions between President and Prime-Minister spread over new spheres of life and economy. As it turned our, Yushchenko and Timoshenko stand on different grounds not only in issues of gas relations with Russia and privatization of Ukrainian enterprises, but also in the sphere of Ukrainian stock market development. “2000” weekly, 21 March 2008 http://2000.net.ua/print?a=%2Fpaper%2F52280 Exchange solitaire. Ukrainian stock market goes under control of big international exchanges – who benefits? Ukraine loses its competitiveness not only in the banking sector but also in the world capital market passing in total control of large international players of exchange and depository markets, and moreover may overrun national banking sector in terms of decentralization? ИнвестГазета, 23 июня 2008 г. Mission impossible? Stock market passions During 17 years of independence Ukraine was not able to develop efficient and civilized stock market where securities issuers and investors would cooperate with clear rules and under control of state authorities and selfregulating institutions … Zerkalo Nedeli, № 11 (690), 22 March 2008 http://www.zn.ua/2000/2675/62463/ Capital reform. Ukrainian stock market modernization needs at least two billion hryvnas State authorities started the biggest in the history of independent Ukraine reformation of the stock market. Signed by the Cabinet of Ministers fiveyears State program for capital market development triggered ambiguous response from its participants. Investgazeta, 17 December 2007 National Bank: field scores and home defeats NBU creates future depository monopolist leaving professional market players overboard. Zerkalo Nedeli, 12 April 2008 http://www.zn.ua/2000/2675/62676/

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Deposits for clients or depositories for bankers? New commercial depository creation by National Bank looks like a feast in time of plague. Recently, the decision was made to increase authorized capital of OJSC “All-Ukrainian Securities Depository” from 80 mln UAH to 153 mln UAH. But whether AUSD becomes really Central Securities Depository even after such “pump” is a big question. The place is not vacant. So, what are bankers creating at the clients cost? Zerkalo Nedeli №17 (745), 16 May 2009 http://www.zn.ua/2000/2675/66203/ “Harry Houdini” could only dream for this … Domestic lobbyists show miracles of disingenuousness. Domestic lobbyists show miracles of disingenuousness. Last year journalists found a document that enlighten lobbying mechanisms for the sake of institutional (as minimum) interests that are quite far from the real necessities of the country. We speak about the letter #100/18915 of the Head of Securities and Stock Market State Commission (SSMSC) Anatoliy Balyuk to the President of Ukraine Viktor Yushchenko of 27 November 2007. From-ua, 31 March 2008 http://www.from-ua.com/eco/dcb4a38b6716f.html President supported SSMSC proposal on Central Depository creation on the basis of National Bank – Mr. Baliuk Unian, 20 November 2007 http://bin.com.ua/templates/news_article_big.shtml?id=71987 National Bank and 20 banks plan to establish “AllUkrainian Securities Depository” Interfax-Ukraine, 14 February 2008 http://news.finance.ua/ru/~/1/30/ua/2008/02/15/118645 Will be third one. National Bank creates one more depository. Kommersant-Ukraine, 18 February 2008 http://www.commersant.ua/doc.html?DocID=854255 Ginzburg steals thunder of Ivchenko Ekonomicheskie izvestiya, 18 February 2007 http://www.eizvestia.com/fin/full/31983 SSMSC elected its President for Central Depository creation. Kommersant-Ukraine, 31 March 2008 http://bankir.ru/news/newsline/smi/31.03.2008/1098786

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Financial Truth. Case 3.